In recent years, Mediterranean Partner countries (MPCs) have been ambitious about reforming their banking and financial systems. Former state‐owned banks have been privatised, and restrictions for international capital flows have been lowered to accelerate investment activities and spur regional economic growth. The purpose of this paper is to evaluate these latest developments against the backdrop of the state‐of‐the‐art literature and derive implications for a reformed institutional setting for sound financial market governance in the Mediterranean region.
Building on recent empirical literature on the relationship between financial development, financial governance, and economic growth, this paper empirically assesses the validity of the so‐called finance‐growth nexus for Mediterranean Partner countries.
The findings indicate that the current institutional set‐up renders an efficient allocation of savings impossible, and thus represents a strong binding constraint on economic growth. In this regard, it is found that adverse financial governance practices have substantially contributed to this outcome.
This paper argues for upgrading domestic regulatory frameworks before continuing a sequential integration and liberalisation process.
It is thought that this attempt is unique in explicitly formulating a comprehensive role for the Euro‐Mediterranean Partnership (EMP) in assisting MPCs on financial governance issues. In this respect, it identifies prevailing incentive schemes for regional actors and opportunities for the EU to actively support the implementation of a reform agenda for financial institutions in the EMP framework.
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